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A new dad looks at 529 plans—for twins!

What new parents—and any parent or grandparent—should know about 529 plans.

Editor’s note: the following was written by Josh Goldowsky, a New York Life staff writer and new father of twins.

When the doctor told my wife the reason she was feeling twice as bad as the mommy-to-be-books said she should, we sighed. “You’ve got two in there,” he said. While we were thrilled at the prospect of an instant family, he might as well have said, “You’ve got two times the cost of everything in there”: twice the food, twice the clothes, and… twice the tuition.

How will I pay for Harvard and Yale at the same time?!?!?!

Deep breath. “I can do this,” I thought. The bill for two college educations totaling half a million dollars comes due in about 18 years. And as much as I wanted to think either was possible, I quickly realized counting on full scholarships or winning the lottery were probably not the wisest strategies. So I set a goal to research and open 529 accounts for both of them within the first month.

What did I learn?

The basics

529 plans were created by an act of Congress in 1996 and provided immediate relief to parents of college-bound kids, with more liberal rules than other savings plans, such as a Roth IRAs.

Anyone can contribute to a 529 plan, no matter how much money they make. (gift tax and other limitations apply, so be aware)

You need to designate a beneficiary, usually the person it is intended for, but you can also name yourself and change it at any time.

When you tap the plan to pay for educational expenses, you are not taxed on the growth of your original investment. However, the earnings portion of a withdrawal which is not made for qualified educational expenses is subject to federal income taxes, applicable state income taxes, and an additional 10% federal tax penalty.

You can—and should—shop around.

Today every state sponsors a 529 plan, but you’re not limited to the plan offered by your state. Although your in-state plan may have state income tax and other benefits you should investigate. in fact, another state’s plan may help you save with lower fees, better historical returns, or better incentives than what your state offers. I’m a New York State resident, and I found that the New York 529 Savings Plan offered me a tax credit on up to $10,000 of contributions a year. Coupled with some of the lowest fees in the country, this plan made the most sense for me.

You’ll also want to take a look at the diversity of products the funds offer. The investment horizon for 529 plans typically won’t be as long as you may be used to—it can literally be less than half as long as those of retirement plans. For this reason, you’ll want to make sure there are plenty of options that match your risk tolerance. Two great resources to start your research are Morningstar and SavingForCollege.com.

What if one kid’s a genius; the other a basketball prodigy.

I’m sure you’ve asked: What happens to my money if my kid gets a scholarship or skips college altogether? The answer may surprise you.

First and easiest, you can change the beneficiary and use the money for a different child. This avoids taxes and penalties altogether. You could also use the money yourself to go back to school or take courses to boost your own career or save it for your grandchildren. If you withdraw money from a 529 account and don’t use it for a qualified educational expense, you’ll be charged:

A 10% penalty

Federal income taxes on any gains, as they will count as income

However, if your child does earn a scholarship and doesn’t need the money for school, the 10% penalty will be waived, but you’ll still pay taxes on your gains.1

You can set it and forget it (well, not forget it).

Just like in retirement funds, some 529 plans offer target date funds (e.g., those funds that automatically reset the asset mix in its portfolio according to a selected time frame selected by the investor, with the assumption that the closer the investor gets to the target date the more the portfolio should reflect an objective of capital preservation) that are automatically rebalanced over time. Beware, though, if you start later and put money into a target date fund, since it will be moving into a more conservative mode that may not allow you to accumulate as much as you could with a more aggressive mix. There is no guarantee that a target date fund will achieve its objective, and there is no assurance that on the target date or any date your original principal investment will have been preserved. As with any investment, it’s always smart to talk to a financial professional who is well-versed in this type of product. Most investment options for 529 plans are not target date funds. Investors should read about the different investment options in the 529 plan Summary Plan Description. There are fees and charges associated with 529 plans. The underlying investment options are subject to market risk and will fluctuate in value.

It’s better to start early, but it’s never too late to start.

Even if your kids are headed off to college in the next couple of years, you can still take advantage of the benefits of a 529 plan. In fact, if you already have money saved somewhere else, you can gift up to five years worth of personal gift limits to a 529 plan in one single contribution.2

The answer is complicated, but a 529 plan does count in the financial aid formula, though potentially less than other assets in your or your child’s name. In addition, the tax-free distribution you take won’t count as income in aid applications for following years, whereas in another type of account, it might.3 You can learn more about 529s and financial aid here.

Did I make the right decision by opening a 529 plan?

I believe I did, but I’ll have to let you know in about 15 years. Just keep in mind, everyone’s financial situation is different, and you need to consider what’s right for you. And you do have options. Speak to your financial advisor to see which ones might be right for you.

Please consider the investment objectives, risks, charges and expenses of an investment in a 529 plan carefully before investing. The 529 plan issuer’s official statement/ Plan Disclosure Statement contains this and other information about the plan and can be obtained from your Registered Representative. Please read the issuer’s official statement/ Plan Disclosure Statement carefully before investing.